This paper reviews the recent literature on monetary policy rules. To organize the discussion, we exposit the monetary policy design problem within a simple baseline theoretical framework. We then consider the implications of adding various real word complications. We concentrate on developing results that are robust across a reasonable variety of competing macroeconomic frameworks. Among other things, we show that the optimal policy implicitly incorporates inflation targeting. We also characterize the gains from making credible commitments to fight inflation and consider the implications of frictions such as imperfect information and model uncertainty. Finally, we assess how proposed simple rules, such as the Taylor rule, square with the principles for optimal policy that we describe. We use this same metric to evaluate the recent course of U.S. monetary policy.

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The Science of Monetary Policy: A New Keynesian Perspective

The paper reviews the recent literature on monetary policy rules. We exposit the monetary policy design problem within a simple baseline theoretical framework. We then consider the implications of adding various real world complications. Among other things, we show that the optimal policy implicitly incorporates inflation targeting. We also characterize the gains from making a credible commitment to fight inflation. In contrast to conventional wisdom, we show that gains from commitment may emerge even if the central bank is not trying to inadvisedly push output above its natural level. We also consider the implications of frictions such as imperfect information.

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Interest and Prices

Part 1 Empirical evidence on money and output: introduction some basic correlations estimating the effect of money on output summary. Part 2 Money in a general equilibrium framework: introduction the Tobin effect money in the utility function summary appendix - the MIU approximation problems. Part 3 Money and transactions: introduction shopping-time models cash-in-advance models other approaches summary appendix - the CIA approximation problems. Part 4 Money and public finance: introduction bugdet accounting equilibrium seigniorage optimal taxation and seigniorage Friedman's rule revisited nonindexed tax systems problems. Part 5 Money and output in the short run: introduction flexible prices sticky prices and wages a framework for monetary analysis inflation persistence summary appendix problems. Part 6 Money and the open economy: introduction the Obstfeld-Rogoff two-country model policy coordination the small open economy summary appendix problems. Part 7 The credit channel of monetary policy: introduction imperfect information in credit markets macroeconomic implications does credit matter? summary. Part 8 Discretionary policy and time inconsistency: introduction inflation under discretionary policy solutions to the inflation bias is the inflation bias important? do central banking institutions matter? lessons and conclusions problems. Part 9 Monetary-policy operating procedures: introduction from instruments to goals the instrument-choice problem operating procedures and policy measures problems. Part 10 Interest rates and monetary policy: introduction interest-rate rule and the price level interest rate policies in general equilibrium models the term structure of interest rates a model for policy analysis summary problems.

Monetary Theory and Policy

Recursive methods offer a powerful approach in dynamic macroeconomics. This book contains both an introduction to recursive tools, including standard applications such as asset pricing, and advanced material, including analyses of reputational mechanisms and contract design. The tools are presented with enough technical sophistication to get the reader started working on practical problems. When numerical simulations are called for, the book provides suggestions for how to proceed, as well as references for further reading. The applications cover many substantive issues in macroeconomics, such as equilibrium asset prices, market incompleteness, wealth distribution, fiscal-monetary theories of inflation, government debt, optimal labour and capital taxation, time consistency and credible government policies, optimal social insurance, economic growth and labour market dynamics.

Recursive Macroeconomic Theory

Alesina, A. (2000). The political economy of budget surpluses. Journal of Economic Perspectives, forthcoming. -, Perotti, and J. Tavares. (1998). The political economy of fiscal adjustments. Brookings Papers on Economic Activity 1:197-248. --, N. Roubini, and G. Cohen. (1997). Political Cycles and the Macroeconomy, Cambridge Mass: The MIT Press. , and H. Rosenthal. (1995). Partisan Cycles, Divided Government, and the Economy, Cambridge UK: Cambridge University Press. Cohen, D. (1993). Preand postelection macroeconomic fluctuations. Harvard University. PhD Dissertation. Fischer, S. (1997). Long term contracts, rational expectations and the optimal money supply rule. Journal of Political Economy 85:191-206. Garfinkel, M., and A. Glazer. (1994). Does electoral uncertainty cause economic fluctuations? American Economic Review, 84:169-173. Perotti, R., and J. Kontopoulos. (1999). Fragmented fiscal policy. Unpublished. Person, T., and G. Tabellini. (1990). Macroeconomic Policy, Credibility, and Politics. Chur, Switzerland: Harwood Academic Publishers. Rogoff, K. (1990). Equilibrium political budget cycles. American Economic Review 80:21-36. Rogoff, K., and A. Sibert. (1988). Elections and macroeconomic policy cycles. Review of Economic Studies 55:1-16. Shi, M., and J. Svensson. (2000). Political business cycles in developed and developing countries. World Bank. Working Paper. Wolfers, J. (1999). Are voters rational? Evidence from gubernatorial elections. Unpublished.

[The Political Business Cycle after 25 Years]: Comment

Standard new Keynesian models assume the functional distribution of income is irrelevant. This stands in contrast to much of the public debate which presumes that a shift in the distribution of income towards workers will boost aggregate demand and employment. Under this latter view, falling wages during a recession can worsen unemployment. In contrast, neoclassical economics often views unemployment as a direct re‡ection of the failure of wages to fall. In this paper, I construct a sticky-price, sticky-wage model of workers and capitalists in which the functional distribution of income matters. Wage income directly

Workers, Capitalists, Wages, and Employment

The productivity and jobs connection: the long and the short run of it

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Forecasting Oil Prices

The Federal Reserve has implemented policies during the past six years that rely on channels of transmission to the real economy that economic models have assumed to exist but seldom tested or on channels that were simply presumed not to exist. I discuss the board channels of monetary policy transmission that may allow forward

Carl E. Walsh

Papers

[The Political Business Cycle after 25 Years]: Comment

Workers, Capitalists, Wages, and Employment

The productivity and jobs connection: the long and the short run of it

Forecasting Oil Prices

Monetary policy transmission channels and policy instruments